Economic Shocks And Exchange Rate Regime Choice

This paper addresses two questions about exchange rate regime choice from economic shock perspective. Firstly, we analyze the effect of monetary shock, real shock, terms of trade shock and speculative shock on economic performance under alternative exchange rate regimes. Secondly, we try to find out how to choose the exchange rate regime to cope with economic shock and maintain economic stabilization.In this paper, we use equilibrium model in classical theory and non-equilibrium model in the function of government target to analyze the effect of monetary shock, real shock, trade shocks, terms of trade shock on exchange rate regime choice. In the empirical section, the data of multinational real exchange rate regime and shock variable are used to verify these theories. We also research the relationship between the speculative shock and exchange rate regime choice, and analyze the theoretical model and mechanism of monetary crisis and banking crisis under alternative exchange rate regime when speculative shock happens, and empirically verify the probability to occur monetary crisis under alternative exchange rate regime.We conclude that the types of economic shock especially the difference between monetary shock and real shock, are the most vital factor in exchange rate regime choice. Also, other factors should to be noticed when we make the exchange rate regime choice from economic shock perspective. Negative correlation between monetary shock and real shock is necessary condition for the goverment to adopt floating exchange rate regime when both shocks happens. When the goverment are active to promote productions, and when monetary shock is the main source of normal economic shock, fixed exchange rate is preferred.We also find that when speculative crisis happens, all the exchange rate regime have the conditions and possibilities to bring out monetary crisis and banking crisis. Through empirical section, we find both medium exchange rate regime and pegged-a -single-currency lead to monetary crisis more easily. The theoretical model of financial fragility and exchange rate regime concludes that the combination of flexible exchange rate regime and final loaner can avoid the banking crisis.Finally, we suggest that RMB exchange rate still has not got the conditions to be full floated, since the economic shock is mainly from monetary shock in China, moreover the negative correlation between monetary shock and real shock is not prominent. Because China goverment are active to promote productions, RMB exchange regime should adopt pegged exchange rate regime. However, pegged exchange rate regime easily lead to monetary crisis and bank crisis when monetary shock come to be speculative shock. So in realistic, the RMB exchange rate regime is preferred to adopt more fixed-adjustable crawling pegged exchange rate regime.